I last wrote about Roku Inc (NASDAQ:ROKU) in early December. At the time, I explained why Roku stock was a buy despite a high valuation.
Two of my InvestorPlace colleagues argued against owning its stock in the $40s for two reasons: It doesn’t make money and its enterprise value is nine times revenue, an excessive multiple even for a growth company.
On one level, I couldn’t disagree.
“As a rule, I’m not a fan of investing in money-losing stocks, but at least Roku has all the makings of a profitable business five years from now,” I wrote December 6.
Sometimes rules are meant to be broken. In the case of ROKU stock, I was willing to make an exception. Since then it’s ridden higher into the $50s, only to come crashing back to the low $40s where it was in early December when I defended its stock price.
Where Now for Roku Stock?
That’s the million-dollar question.
My thesis for a higher stock price is based on pure math. If Roku gets more active accounts and those users stream more content, advertising rates go up, which is the company’s primary strategy for growth.
The company announced fourth-quarter 2017 earnings February 21; Roku stock dropped 18% in a single day on the news. Investors ignored the good news of the fourth quarter and instead focused on the company’s conservative guidance for Q1 2018.
Analysts are expecting $132 million in revenue in the quarter while the company is projecting as low as $120 million or 10% less than Wall Street.
Down she goes. Buy on rumor, sell on news.
I don’t know about you, but I’d rather own shares in a company that opts for conservative rather than aggressive guidance, especially if it’s only been a public company for two quarters.
If Roku hits at the lower end of its revenue projection for the quarter, it will still deliver 20% year-over-year growth. That’s not too far off the 28% growth in the latest quarter.
Roku Stock Earnings
I don’t see a problem in its earnings that justify an 18% cut in its share price, but the stock market is the ultimate voting machine.
For me, it’s all about three things: Increased accounts, more hours of streaming and higher ARPU.
In Q4 2017, ROKU increased active accounts by 44%; streaming hours by 55%; and ARPU by 48%. On a sequential basis it increased the trio of metrics by 13.8%, 13.2% and 8.7% respectively, and better than Roku’s sequential growth in the third quarter.
In other words, business is moving in the right direction, demonstrated by the fact it only lost $19.6 million in 2017, less than half the amount from last year.
By this time next year, it very well could be in the black.
Possible Concern for Roku Stock
Seeking Alpha contributor Max Greve raised some valid points February 28 about Roku’s ability to grow ad revenues. His big concern is that Roku’s data analytics offer very little for advertisers that others such as YouTube don’t already provide.
“Roku doesn’t gather as much data as those companies and can’t mine it nearly as effectively,” Greve said. “Its claims of unique access to underserved populations must also be discounted somewhat in light of YouTube’s unparalleled scope.”
Translation: Roku might be growing active accounts and hours streamed but if it doesn’t make its data collection more robust, advertisers will catch on, and rates will plummet.
He’s right to warn investors that there might be some rough patches over the next 12-24 months as Roku faces greater competition mixed in with skepticism on the part of advertisers.
If you own Roku stock, I would not let this scare you out of your position, but it is an eye-opener for anyone who believes Roku’s business model is bulletproof.
Bottom Line on Roku Stock
At the end of Greve’s article, I happened to read all of the comments. Several people were freaked out about the lockup period expiring at the end of March.
“Very concerned about the Lockup expiration in late March,” one user wrote. “I’ve heard that the insiders have an average cost of $2.50. If that’s true, there will probably be blood in the streets.”
Let me stop you right there.
If you bought ROKU stock after it went public and didn’t take into consideration the 180-day lockup period, than you are not a long-term investor.
A long-term investor would have bought knowing that the end of the lockup period might potentially be a buying opportunity and they would have put aside some cash to buy more.
On top of that, Roku’s stock is up almost 200% since its initial public offering last September. Any shakeout from the expiration of the lockup is only natural after a stock’s come this far, this fast.
If you want to own this stock, I’d buy it, with cash in reserve to jump on any further decline in its stock price, lockup induced or otherwise.
In my opinion, Roku’s story is alive and well.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.